Oil plunges 6% as US-Iran pause eases geopolitical risk premium

A weekend halt in US-Iran hostilities triggered the sharpest single-day oil selloff in three months, unwinding a portion of the risk premium that had pushed Brent crude above $100 a barrel.

Brent crude tumbled 6.5% to $90.50 a barrel Monday after Washington and Tehran paused military strikes over the weekend, while gold edged higher as markets weighed whether the truce can hold.

"The market is pricing out the tail-risk scenario of a full Hormuz blockade, but the residual premium remains substantial given proxy forces are still active," said Helima Croft, head of commodity strategy at RBC Capital Markets.

West Texas Intermediate crude fell 6% to settle below $84 a barrel, while natural gas retreated 3.8% as energy security concerns eased. The pullback erased roughly half the gains accumulated since late February, when the US and Israel escalated strikes on Iranian territory. Australian energy majors — which had surged 25% to 35% year-to-date — reversed sharply, with Woodside Energy dropping 2.93% and Santos declining 3.64%.

The pause reduces near-term inflation pressure that had pushed the US average gasoline price to $4.11 a gallon, up from $3.15 a year ago, and lowered the probability that the Federal Reserve will need to resume rate hikes. CME data showed traders pricing a 36% chance of a hike at the next meeting, down from elevated levels last week.

The Strait of Hormuz, through which about a fifth of the world's oil passes, had become the central flashpoint after attacks effectively halted normal shipping traffic. While direct US-Iran strikes have paused, Iran-aligned Houthi forces continued attacks on Red Sea shipping and claimed strikes on Saudi energy installations at Jazan and Yanbu, indicating that proxy pressure on supply chains persists.

Gold firmed as uncertainty over whether the pause will evolve into a durable ceasefire kept safe-haven demand intact. The metal has benefited from a dual tailwind: geopolitical anxiety that supports buying, and the prospect that lower oil prices could allow central banks to ease policy, reducing the opportunity cost of holding non-yielding assets.

The last time a US-Iran confrontation de-escalated this abruptly was in January 2020, after the US killed Qasem Soleimani and both sides stepped back from all-out war. Brent crude fell 15% over the following two weeks, while gold surrendered its safe-haven gains within a month as markets refocused on supply abundance.

Residual risks remain elevated. Traffic and insurance conditions around Hormuz are still tight, with many shippers cautious about transits. Additional disruptions at Russia's Sheskharis terminal in Novorossiysk and ongoing Black Sea war-related issues have compounded concerns about total global export capacity. OPEC+ production decisions in response to price weakness and US shale output trends will be key watchpoints in the weeks ahead.

For investors, the key question is whether Monday's decline marks a temporary cooling of an overheated rally or the beginning of a more sustained derating. Bulls argue that structural tightness in oil markets — driven by years of underinvestment and rising demand — will reassert itself once diplomatic headlines fade. Bears counter that the magnitude of the selloff demonstrates how much of the recent rally was driven by fear rather than fundamentals, leaving energy stocks vulnerable to any durable US-Iran understanding.

This article is for informational purposes only and does not constitute investment advice.